Government proposes cap on unfair dismissal payouts

The Government has published its response to the consultation on “ending the employment relationship”, which includes its intention to reduce the cap on the maximum compensatory award for unfair dismissal.

The Government response includes a number of proposals, but perhaps the most significant is a proposed cap on the compensatory award for unfair dismissal: The Government has confirmed that, subject to parliamentary approval, it plans a cap of 12 months’ pay of the employee concerned. This will apply where this amount is less than the overall cap, which is currently £72,300.

XpertHR senior employment law editor Jeya Thiruchelvam said employers would benefit substantially from the proposal. She said: “The Government’s intention is certainly good news for employers, particularly in relation to lower earners, because the maximum amount of compensation employers may be ordered to pay out by a tribunal will be drastically reduced.

“The compensatory award of an employee on, for example, £16,000 per annum, will reduce from £72,300 (the current overall cap) to an amount representing 12 months’ net pay. The overall cap will still apply if an employee’s pay for 12 months exceeds it.

“Although the change will undoubtedly give employers more certainty in terms of their potential liabilities when facing an unfair dismissal claim, it is worth bearing in mind that according to the Government’s own consultation document the (median) average unfair dismissal award is less than £5,000”.

Glenn Hayes, partner at law firm Irwin Mitchell, added: “Given the current state of the UK job market, this is likely to have a far-reaching effect on a number of individuals who approach the employment tribunal system.

“Proposing such a measure at a time when fees are likely to be introduced in order to bring a claim in the first place could be extremely detrimental to employees who may have previously been adequately compensated for losses based on the limited job market but would of course be a welcome move for employers. The entire purpose of the compensatory award however is to do just that – put the individual back in the position they would have been had the unfair dismissal not occurred and this proposal could have a huge impact on that purpose.”

In addition to the proposed cap, the Government also outlined measures relating to the use of settlement agreements. It has said it will produce guidance on the use of settlement agreements, and also confirmed that employers and employees will be protected against “improper behaviour”, which will disapply the rule that certain evidence will be inadmissible in unfair dismissal claims.

Further clarification of what constitutes improper behaviour will be included in the statutory code of practice and accompanying guidance. However, the reality is that case law is likely to be required in order to properly define it.

For full coverage of the Government’s response, visit XpertHR.